The Pentagon awarded Microsoft Corp. a hotly contested and controversial contract to build a large cloud-computing system for the U.S. military in a major setback to rival Amazon.com Inc., which was widely seen as the front-runner.

The so-called JEDI contract could be worth up to $10 billion to Microsoft over a 10-year period if the Pentagon exercises all options under the deal, the Defense Department said late Friday.

Amazon was the only other remaining bidder after several other firms were earlier eliminated from contention.

The process for developing and awarding the Joint Enterprise Defense Infrastructure contract has been fraught, amid multiple conflict-of-interest allegations and legal challenges, as well as concerns that opting for a single-source vendor might not be best for the military. Defense Secretary

Mr. Esper this week said he was withdrawing from reviewing the contract to avoid the appearance of a conflict of interest. His son worked for one of the original bidders that was no longer in the running for the deal.

The contract award gives a considerable boost to Microsoft’s ambitions of building up its government cloud business. It is a big blow to Amazon’s goal of making government contracts a larger portion of the business for its cloud division, known as AWS. Amazon last year announced it would build a new campus outside Washington, D.C., to house its expanding government-linked operations.

The deal could also yield some benefit to Oracle Corp., which announced a cloud interoperability arrangement with Microsoft earlier this year that could help Oracle keep and build its defense business under JEDI.

Amazon had hoped to leverage a Pentagon deal into similar arrangements with other Western governments, some rivals believe.

Instead, Amazon has lost out for now on the JEDI deal. And its contract with the Central Intelligence Agency, a landmark deal the company secured several years ago, also is winding down early, as the CIA seeks to revise and improve its cloud capacities.

Amazon said it was “surprised about this conclusion. AWS is the clear leader in cloud computing, and a detailed assessment purely on the comparative offerings clearly lead to a different conclusion.” The company, which can file a protest against the outcome, didn’t immediately say if it planned to contest the award.

Microsoft didn’t provide an immediate comment.

“It’s a great win for the company. It further validates the Azure platform and their trusted position in the enterprise,” said Brad Reback, an analyst at Stifel, Nicolaus & Co.

The Pentagon has more than 500 separate clouds. JEDI would serve as an umbrella system to rationalize that number and provide the military with access to services that better keep up with the pace of technology in civilian markets.

“We must improve the speed and effectiveness with which we develop and deploy modernized technical capabilities,”

Dana Deasy,

the Defense Department’s chief information officer, said in a statement after the award was announced.

The initial two-year contract includes option periods extending the potential award over a decade. The Pentagon also wants upgrades at commercial prices but with tough built-in cybersecurity protections.

Most of the concerns about the JEDI procurement process have centered on allegations that Amazon had improperly influenced the bidding. Amazon has denied the allegations

One of the issues that arose in the process was the role of Deap Ubhi, who previously worked at Amazon’s cloud division before going to the Pentagon, where he worked on the JEDI program. He later returned to work for AWS.

The Pentagon initially concluded that Mr. Ubhi “did not negatively impact the integrity of the JEDI procurement” through his work on the project, according to a Defense Department filing earlier this year.

The alleged conflict of interest led Oracle to file a legal challenge with the U.S. Court of Federal Claims, which rejected the concerns. That decision has been appealed by Oracle, which had filed a protest after it was eliminated from the bidding process. Oracle declined to comment Friday on the award to Microsoft.

The Pentagon Inspector General’s office began investigating the procurement even before a ruling was made on the bid protest, and the Defense Department formally referred some concerns to the IG.

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